Home truths about the US crisis
November 3, 2008
It is difficult to convey the meaning of 20 trillion dollars. If you were to multiply the entire Australian gross national product by 75, you would get an approximate sense of $US20 trillion, which is roughly the combined weight of the United States national debt plus the losses in American asset values sustained so far in the current financial scandal.
I use the term "scandal" because to call it a financial "crisis" is too kind. The more you learn, the more it turns your stomach. And don't think Senator Barack Obama was not a tiny part of this problem, even though he is presenting himself as an architect of the solution.
Even so, if I were voting in the US presidential election, I would vote for Obama despite his paltry legislative achievements (as distinct from his brilliant political achievements). His opponent is a man too hidebound and too bellicose, the embodiment of the fading age of American imperialism. Senator John McCain also cynically chose an attractive but unqualified vice-presidential running mate to help galvanise his campaign, for all the wrong reasons.
It would be heartening to believe that either Senator Obama or Senator McCain have been candid when discussing their own roles in helping to create, or at least confront, this now gaping hole in the heart of the US economy. It would also be heartening if either of them had presented a credible plan for how to mend the wound. But neither has been candid or credible on the subject.
If either man had told the truth, this is what they would have told you:
For the past 20 years, the guard rails of the US mortgage system were either weakened or dismantled, by both parties, for ideological reasons. The Republicans were part of the process because of their obsession with deregulation and market forces. The Democrats contributed because of their ideological obsession with race.
A root cause of the mayhem was social engineering. Greed then completed the process. I've trawled through scores of news reports from America and have selected and boiled down the following story from the Milwaukee Journal Sentinel because it encapsulates what took place across America:
While earning a salary of $US21,000 ($31,420) a year, Leesa Robinson assembled a property portfolio worth almost $US1 million in 2006. The 45-year-old single mother had started buying houses after watching late-night infomercials. Several lenders provided home loans totalling $US800,000 so she could buy eight rental properties in working-class, inner-city neighbourhoods in Milwaukee.
Half were purchased with no money down. All but one of the loans came with high-interest, adjustable rates. During 2007, she lost all eight houses and went bankrupt as Milwaukee's mortgage crisis hit primarily low-income, predominantly African-American neighbourhoods, where borrowers with meagre financial resources had received loans to buy property or refinance their mortgages. Many mortgages unravelled within months. The median time from the date of the loan to the filing of the foreclosure suit was 427 days.
A majority of borrowers had a troubled financial past before they received mortgages. Nearly a quarter of successful loan recipients had previously filed for bankruptcy. But financial institutions, real estate agents, mortgage brokers and appraisers raked in upfront fees before the risky loans were packaged and onsold to Wall Street. Now, as taxpayers finance a $US700 billion bail-out, tens of thousands who have lost their homes will not benefit.
What this story from Milwaukee hints at, but does not expressly state, is that the US Government is going to have to spend a vast amount of money to solve a problem it helped create.
The US housing market is dominated by two companies set up by Congress, known as Fannie Mae and Freddie Mac (their real names are too complicated). From 1938 to 1968, the US secondary mortgage market was monopolised by Fannie Mae, operating as a government agency. In 1968, to help balance the federal budget, Fannie Mae was converted to a private corporation. To offset this private monopoly, Congress chartered Freddie Mac as a competing private corporation.
The system worked well until 1995, when Freddie Mac began receiving government credit for buying or guaranteeing lower-quality mortgage debt from lower-income borrowers. By 2003, it was obvious bad credit was infecting the system and President George Bush recommended a legislative overhaul. The reform was blocked by the Democrats because it would restrict financing for low-income housing for minorities, a critical part of the Democratic base.
At the same time, another guard rail was being dismantled. The private debt ratings agencies, most notably Moody's, were becoming overwhelmed by the quantity and complexity of financial instruments being issued by the banks.
In 1999 a prominent Democrat, Howell Raines, chairman and chief executive of Fannie Mae, began a program which eased credit requirements for lower-income borrowers, especially "minority" applicants. Raines is African-American. In 2006, the Government filed suit against Raines to recover some of the $US90 million in income he had made at Fannie Mae based on overstated company earnings. The suit was settled this year and Raines fined about $US1 million.
Although he is now regarded as a culprit in the credit scandal, Raines is an adviser to Senator Obama. His predecessor as chief executive at Fannie Mae, James Johnson, is also an adviser to Obama's advisory team. After arriving in Congress, Senator Obama received $US126,349 in campaign contributions from Fannie Mae and Freddie Mac, the second-highest amount given to anyone in Congress.
Don't get too starry-eyed about the magnetic Obama. Modern politics requires a calculated political cunning, which he has in abundance
But that's a whole other story.